The Carrot and the Stock: In Search of Stock-Market Incentives for Decarbonization

Laurent Millischer, Tatiana Evdokimova and Oscar Fernandez

No 2022/231, IMF Working Papers from International Monetary Fund

Abstract: Financial markets can support the transition to a low-carbon economy by redirecting funds from highly emissive to clean investments. We study whether European stock markets incorporate carbon prices in company valuations and to what degree they discriminate between firms with different carbon intensities. Using a novel dataset of stock prices and carbon intensities of 338 European publicly traded companies between 2013 and 2021, we find a strongly statistically significant relationship between weekly carbon price changes and stock returns. Crucially, this relationship depends on firms’ carbon intensity: the higher the carbon costs a firm faces, the poorer its stock performance during the periods of carbon price increases. Emissions covered with free allowances however do not affect this relationship, illustrating how both carbon pricing and disclosures are needed for financial markets to foster climate change mitigation. The relationship we identify can provide an incentive for firms to decarbonize. We argue in favor of more ambitious carbon pricing policies, as this would strengthen the stock-market incentive channel while causing only limited financial stability risk for stocks.

Keywords: European Union Emissions Trading Scheme; Carbon price; Stock price valuation; Climate Finance; Climate Change Mitigation; Multifactor Market Model; stock-market incentive channel; firm face; IMF working papers; carbon intensity; Greenhouse gas emissions; Asset prices; Non-wage benefits; Inflation; Europe (search for similar items in EconPapers)
Pages: 56
Date: 2022-11-18
New Economics Papers: this item is included in nep-ene, nep-env and nep-fmk
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.imf.org/external/pubs/cat/longres.aspx?sk=525748 (application/pdf)

Related works:
Journal Article: The carrot and the stock: In search of stock-market incentives for decarbonization (2023)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:2022/231

Ordering information: This working paper can be ordered from
http://www.imf.org/external/pubs/pubs/ord_info.htm

Access Statistics for this paper

More papers in IMF Working Papers from International Monetary Fund International Monetary Fund, Washington, DC USA. Contact information at EDIRC.
Bibliographic data for series maintained by Akshay Modi ().